Legal battle looms for breakaway Angus & Robertson franchisees

A legal fight between 25 former Angus & Robertson franchisees and the administrator of collapsed bookseller REDgroup Retail is looming, after the administrator indicated it would fight the franchisees’ attempt to leave the stricken chain.

Yesterday, 25 Angus & Robertson franchisees said they would become independent booksellers, claiming Redgroup breached their franchise agreements when it failed to honour gift cards issued by the chain, and they were no longer receiving the benefits of being a franchisee.

But REDgroup retail administrator Ferrier Hodgson has said it intends to “hold each of the franchisees fully accountable under the terms of the franchise agreements.”

Marie Fitzpatrick, of the Bookshop Bowral (formerly Angus & Robertson Bowral), told SmartCompany that the group has yet to be contacted directly by the administrator, but has received an “enormously positive” customer response to its decision.

Fitzpatrick says of the emails she has received from group members, “everybody is reporting a very positive customer response.”

But a legal battle now looks likely, with franchising experts saying the rights of franchisees when a franchisor goes into administrator remains a very grey area.

Jason Gehrke, director of the Franchise Advisory Centre, described the move as “bold”, saying it is generally the case that the collapse of a franchisor doesn’t relieve franchisees from their obligations and the onus will be on the independent retailers to prove a breach of the agreement has occurred.

Speaking as an outside observer, Gehrke says if the shoe was on the other foot, the franchisor would generally be obliged to send the franchisee a breach notice to outline the nature of the breach, what needs to be done to fix the problem and a reasonable time to do so.

He expects the administrator, Ferrier Hodgson to put up a fight.

“The administrator will not let this pass lightly, because they are obliged to preserve as much value in the asset as they can, and if the franchisees exit the system, then that substantially erodes the value of the asset that the administrator has available to sell to a future buyer,” he says.

While Gehrke was unable to think of a recent example when franchisees of insolvent franchisors have been able to terminate their agreement, he cautions that there might be more to this case than meets the eye.

On the franchisees’ complaints that the decision of the administrator to not wholly honour its gift cards hurt their business, Gehrke says the legal argument might depend on whether the cards are specifically provisioned within the franchise agreement.

Frank Zumbo, associate professor at the University of New South Wales, says usually when a parent company collapses, administrators sit down with franchisees and nut out an agreement, particularly if the landlord is willing to extend the lease to an independent store.

“The administrator is often happy to let them go on the basis that it’s one less thing to worry about, but it depends on whether the administrator feels it could find a buyer,” Zumbo says.

He says an obvious way to improve the issue would be to legislate to allow the franchisee to terminate the agreement when a franchisor goes into administration.

But Gerhke says one positive may have emerged from yesterday’s announcement.

“These 25 franchisees have also indicated a strong will to survive and continue operating their business, and I wonder whether that might represent an opportunity for them to pursue a franchisee buyout,” he says.